please help - MassBike's corporation is currently unlevered...

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Unformatted text preview: MassBike's corporation is currently unlevered, has equity valued at $4.25 million, and has earnings before interest and tax of $1.25 million. In order to save on taxes, MassBike's CEO suggests that the firm should issue debt and use the proceeds to retire shares of stock. The capital structure change results in $1.20 million of new debt with an annual interest expense of 8 percent. How much in taxes will MassBike save, per year, as a result of the decision to issue debt? Use a corporate tax rate of 34 percent. a. $32,640 b. $408,000 c. $56,000 d. $642,350 e. $52,420 Still consider Massbike Corporation in the previous one, suppose that the debt is permanent, meaning that the same amount of debt will stay on the books year after year forever. Under this scenario determine the how much in value the permanent debt tax shields provide? a. $32,640 b. $408,000 c. $56,000 d. $642,350 e. $52,420 US Parcel Inc has 9000 shares of stock outstanding and a current stock price of $25.00 per share. The US Parcel Inc has 9000 shares of stock outstanding and a current stock price of $25....
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This note was uploaded on 01/21/2012 for the course FINANCE 301 taught by Professor Barbara during the Spring '11 term at Berkeley.

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please help - MassBike's corporation is currently unlevered...

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